- The Washington Times - Wednesday, April 29, 2009

To avoid a bankruptcy of Chrysler LLC at the end of the week, the Obama administration is trying to push through a deal that gives the automaker’s unions majority ownership - a deal that could blow up if the company’s lenders reject it.

The administration moved to put its labor allies in the driver’s seat a day after General Motors Corp. announced a restructuring plan that would give the government majority control of the auto goliath in exchange for wiping $27 billion of taxpayer loans off the books, while GM’s unions would get a 39 percent stake in the company.

The fate of Chrysler, a storied American company and global industrial giant, could be largely decided this week in response to what appears to be the government’s final offer. The future shape of GM, if government deadlines hold, will be decided within a month.

The Chrysler plan was panned by corporate and financial analysts as a bad deal that would not prevent the company from either going bankrupt or getting bailed out by taxpayers.

“Looks like unions win, bankers lose,” said Jack Welch, former chief executive of General Electric Co., whose widely followed management style made GE one of the most respected companies in the world when he ran it from 1981 to 2001.

The pending proposal for Chrysler eventually would give the United Autoworkers Union a 55 percent stake in the company. That would exceed even the 35 percent share eventually given to Fiat, Chrysler’s purported partner whose agreement to the deal will be critical if the company is to stay afloat. Chrysler’s secured bank lenders would get no more than a 10 percent stake along with $2 billion in cash to expunge nearly $7 billion in debt.

While the company’s biggest lenders appear to have agreed to take the cash, dozens of smaller lenders still have not signed off on the deal and still could force the company into bankruptcy. The administration has given the company a Thursday deadline to complete agreement on the restructuring deal.

Mr. Welch said the auto companies would be better off getting out from under government control and going bankrupt. They would be able to get a fresh start as new companies that would be free of debt and free of union constraints that have hobbled the American car companies and made them uncompetitive with foreign manufacturers.

He said the best hope for Chrysler is that its bankers will reject the government offer and force the company into a bankruptcy reorganization. But he said the government appears to be using the bailout funds it has given the top four bank lenders - JP Morgan, Citigroup, Goldman Sachs and Morgan Stanley - as a “club” to force the banks to accept the Chrysler deal.

Giving the union control of the company “seems fitting since the unions are one of the principal reasons why Chrysler went broke. They destroyed it and now they’re getting the spoils,” said Peter Schiff, president of Euro Pacific Capital.

Mr. Schiff said union management of the company is not likely to work, and Chrysler will either end up in bankruptcy or back on the taxpayers’ doorstep within months.

“I don’t think any real structural reforms are going to take place if we entrench the unions in control of the company,” he said. “What this is trying to do is preserve the labor union,” which would otherwise be wiped out in bankruptcy, he said. “We don’t want to preserve the labor union. The real reason they’re broke is year after year, Chrysler’s management caved into union demands.”

Mr. Schiff said the plan may lead to Chrysler being “continuously bailed out” by taxpayers, which would be easier for the administration to defend to Democrats in Congress if unions control the company.

But the plan may be rejected before it gets that far, he said.

“I don’t know why Fiat would want to be a minority shareholder” subject to the whims of the union, he said. Fiat, which hopes to use an alliance with Chrysler to gain a foothold in the U.S. market while transferring cutting-edge small-car technology to the American firm, would be better off buying pieces of Chrysler that it wants in bankruptcy, he said.

Some union members said they don’t want control of the auto companies so much as the cash they could eventually get from selling their equity shares to help fund union pension and health care benefits.

“This is about taking an equity stake in the corporation to fund” the retiree health care trust fund, said Brian Fredline, president of the UAW’s Local 602 in Lansing, Mich., speaking of the GM restructuring plan.

“That doesn’t mean we hold a majority stake in any corporation. That is not what we do. … Once GM emerges profitable again, we know down the road we can redistribute stock and fund the [trust fund] for all of our retirees who put in 35 to 40 years and who deserve this. We have an obligation, the company has an obligation and so does the United States government.”

Mr. Fredline, who represents GM workers at GM’s Delta Township plant, said most union members feel they have no control over the situation. He described himself as “mad as hell.”

“We’re a little frustrated that things are happening out of our control, and we are fearful. What we can control is coming to work, building quality vehicles, getting an honest day’s work. But the financial part of it, the way the corporation is run, that we can’t control,” he said.

Mr. Fredline said he likes the GM restructuring plan “because it is taking care of the Main Street people. If we have to spend a little money to take care of Main Street, then I think the bondholders should be willing to take a little haircut to make sure the company stays profitable. … If they are not willing to do that and if they drive this company into bankruptcy along with the tens of thousands of active and retired employees, just so they can get a better deal, then shame on them.”

On Capitol Hill, the prospect of job losses and plant closings associated with GM’s restructuring plan appeared to trump concerns that the federal government was on the path to becoming the de facto owner of the nation’s biggest carmaker.

“Our state has been hit hard enough already,” said Rep. Gary Peters, Michigan Democrat. “The purpose of providing General Motors taxpayer-funded loans was not just to keep GM in business, but to preserve American jobs.”

He added, “We all know that GM must make cutbacks, but preserving as many American jobs as possible must be the primary goal of all restructuring efforts.”

Sen. Carl Levin, Michigan Democrat, said he had been assured by the White House that saving jobs “will be a significant factor in the Treasury’s reaction to the General Motors proposal.”

Rep. Thaddeus McCotter, Michigan Republican, said he was concerned about creeping nationalization of GM, however. Already, the government has fired the company’s former chief executive and asserted control over major decisions by the Detroit automaker. On Tuesday, for example, GM said it was suspending payment of executive bonuses pending a review by the government.

“What we’re starting to see again is the government beginning to act as if it is a business in and of itself,” Mr. McCotter told Bloomberg Radio.

• Andrea Billups and David Sands contributed to this report.

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